Which is the best index fund

Index Funds (ETFs)

Invest in stocks easily and cheaply: with index funds

Hendrik Buhrs
Expert for banks and stock exchanges as of March 5, 2021

Hendrik Buhrs

Hendrik Buhrs is an editor in the bank and insurance team. Before joining Finanztip, he reported on economic and consumer issues for the radio programs of the Hessian and later of the West German Broadcasting Corporation. Hendrik studied economics in Münster and Exeter. He gained his first professional experience at Radio Q and on Recklinghausen local radio. He likes to invest the money he has saved in travel.

  • With index funds (ETFs, Exchange Traded Funds) you can build up long-term wealth with stocks, easily and cheaply.
  • ETFs replicate lists of stocks, so-called indices such as the Dax, S&P 500 or the MSCI World stock index. With an ETF, you get just as much return as the broad mass of equity investors.
  • ETFs are just as safe as actively managed funds: Money that you have invested in ETFs is a special fund and is protected in the event of the ETF provider going bankrupt.

To the ETF calculator

  • Either invest a larger amount in ETF shares or save up monthly with an ETF savings plan.
  • To build wealth over the long term, invest in an ETF that automatically pays dividends for you (reinvested). This is how you benefit from the compound interest effect.
  • Finanztip recommends the following global ETFs: iShares (ISIN: IE00B4L5Y983), Source (ISIN: IE00B60SX394) and Xtrackers (ISIN: IE00BJ0KDQ92). The identification number is in brackets.

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They are trendy: exchange-traded index funds, in English "Exchange Traded Funds“Or in short: ETFs. This refers to funds that track the performance of well-known stock market indices such as Dax or S&P 500. Around 1,600 ETFs were available on the Frankfurt Xetra exchange alone in February 2021.

With ETFs it is every private investor possible the investment even in hand to take. An online custody account is sufficient to easily and cheaply participate in the stock market and to build up long-term assets. Already today every seventh eurothat Germans invest in funds, in an ETF.

Video: Build a fortune with stocks in ETFs

What are ETFs and how do they work?

An ETF is a replica of a stock market index: In the simplest case, a fund company takes the investors' money and buys all the securities that are contained in the index. Most of them are stocks or bonds.

Let's take the German Dax share index as an example: This index shows how much the 30 largest companies in Germany are worth. An ETF that tracks the Dax would now buy exactly these 30 shares - and then develop in value just like the Dax.

Investors invest "in the market"

A stock index often summarizes those companies that are on the stock exchange are most worth - that is, their stock market price multiplied by the number of shares results in the largest amount (stock market value). They are also the ones with the broad mass of investors most popular company. One therefore also speaks of the fact that a stock index “tracks the market”.

The aim of an ETF is to achieve exactly the return that the index achieves. An ETF is trying with that not at the momentto be smarter and better than the broad mass of investors by carefully selecting individual stocks. With an ETF you can participate in market events easily and cheaply, you follow the majority.

Which stocks end up in the index is checked several times a year. If the composition of the index changes, the ETF also improves.

ETFs are unbeatably cheap

This strategy gives ETFs a great advantage: They cost significantly less than funds in which a fund manager selects shares individually (so-called active funds). Not only do you pay significantly less or no commission for brokering (buying) ETFs. In the best case scenario, the running costs also make up only one seventh of the costs of active funds. In the ETF, more of the actual performance is retained from the outset.

Differences in costs between active and passive funds

 passive index fundsactive equity funds
Investment objectiveReplication of a benchmark indexbeat the benchmark index
running costsabout 0.2 to 0.5% per yearabout 1.5% per year
acquisition costone-time up to 0.25%one-time up to 5%
Profit sharingnot applicableup to 20% of the annual return

Sources: Provider (as of August 18, 2016)

Various studies have shown that only very few actively managed funds manage to outperform the general public in the long term, even after deducting all costs. This is another reason why Finanztip recommends only exchange-traded funds when investing in shares.

If you would like to read in more detail about how the individual costs for ETFs are made up, please continue reading in the Costs section below.

Different types of ETFs

Index funds approach the task of simulating a stock index differently: There are two different types of ETFs. The way in which investors participate in company profits (dividends) can also differ.

Physical ETF - If an ETF simply buys the securities (shares) in the index, experts speak of a physically replicating ETF. They are usually very popular with investors because they are understandable andtransparent come along: Investors always know exactly in which securities they have just invested money. It can also happen that an ETF does not actually buy all stocks, but only an optimized selection (optimized sampling).

Synthetic ETF -Instead of buying additional shares individually, the ETF provider can also have the desired performance guaranteed by a bank. In return, the bank receives a basket of well-known stocks from the ETF provider. This swap can end up being cheaper for both parties.

Distributing ETF - If a company generates a profit, this is regularly distributed to shareholders as a so-called dividend. If there are stocks in a fund, the dividends flow to the fund first. He can then pass the distributions on to the investors in a bundle. This reduces the value that is in the fund. For this, investors can use the dividends for examplePay taxes.

Reinvesting ETF -An ETF also has the option of crediting the dividends to the fund's assets. One then speaks of a reinvesting or reinvesting ETF. Such ETFs are suitable for investors wholong-term assets want to build. Because the dividends also benefit from a (positive) performance, similar to the compound interest effect.

If you want to understand in more detail how physical and synthetic ETFs differ, read on below.

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Which ETFs does Finanztip recommend?

Finanztip calculations have shown that investors who have any 15 years in the past into a global equity index funds invested never lost money. Behind this is that such an ETF risks loss on many shoulders distributed and thereby compensates.

We therefore recommend that you invest long-term in an ETF that has the covers global stock market and Reinvesting dividends. ETFs that emulate the following stock indices are eligible.

  • MSCI World: It covers the 1,600 largest stocks in the industrialized world.
  • MSCI All Countries World: It bundles almost 3,000 stocks from the industrialized world and from emerging countries such as China, India and Brazil.
  • Sustainable indices: They contain the shares of a global index that operate sustainably - that is, they pay special attention to the environment, social standards and management.

In 2020 we analyzed ETFs on these indices and can recommend exchange-traded funds from various providers. All of the ETFs reinvest dividends in the fund's assets. Savers benefit from a kind of compound interest effect. The ETFs are suitable for long-term wealth accumulation.

Use the ETF calculator to find the right funds for your portfolio

Who is behind the ETFs

ETFs are usually set up by banks and special fund companies. The brand's ETFs are the largest in Europe iShares, which belong to the US wealth manager Blackrock. This is followed by ETFs of the brand Xtrackers, which is majority owned by Deutsche Bank through the fund company DWS, and ETFs of the brand Lyxorbelonging to the French Société Générale.

In the German-speaking area is the ETF brand Comstage known, which originally belonged to Commerzbank. In autumn 2018, the Société Générale Comstage took over. The ETFs were adjusted in the second half of 2020, i.e. former Comstage ETFs now operate under the name Lyxor. As of now, however, the changeover has no disadvantages for savers. British ETF provider are SPDR (read: Spider) and Source.

Criteria for the Finanztip ETF recommendation

The main reason for our recommendation was that the ETF was already more than five years on the stock market to buy there more than 100 million euros Investor money is invested and important investor information about the product in German be available.

A certain one Age an ETF has to be in order to be able to check whether the ETF has really hit the performance of the underlying index. A certain one Investment volume is necessary in order not to risk that the ETF provider will take the index fund off the market because it is not worthwhile.

The current costs of an ETF are against it no recommendation criterion. Financial tip calculations over the past few years have shown that ETFs with lower running costs have not systematically achieved more returns than more expensive ETFs every year.

For example, some ETFs lend part of the shares to other banks on a short-term basis, which brings in additional profit. Or they manage to get more withholding tax reimbursed. In case of doubt, the higher costs are worthwhile.

In the end, it is important that the ETF comes close to the performance of the so-called net index after costs. All of the ETFs we recommend achieve this. The net index takes the value of all stocks, subtracts withholding taxes and adds dividends.

A company can go bankrupt, an industry can slide into a permanent crisis. But in a good market-wide ETF there is a "best of" of the stock market - that catches such outliers again. As a financial investment, it is an excellent mix of little effort and a reasonable return - at low costs.

Hendrik Buhrs
Our experts for banks and stock exchanges

Where and how can you buy ETFs?

If you want to buy ETFs and then keep them, you don't have to go to the branch bank. You can save yourself the fees that the banks often charge for the securities account. Instead, open one free online depot at a direct bank or a broker (securities dealer on the Internet).

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We recommend either depots where you can buy and sell ETFs very cheaply, or particularly practical depots. In March 2021, we filtered the best out of 12 free depots.

More on this in the securities account guide

  • With the right securities account, you pay little for buying and selling equity funds (ETFs).
  • Finanztip recommendations: Among the cheap and versatile custody accounts did the best: ING, Comdirect and Consorsbank and DKB. The cheapest providers are: Smartbroker, Scalable Capital (Free Broker) and Trade Republic.

To the advisor

Ordering ETFs made easy

Once you have opened the custody account and decided which stock index you want to invest in, you are almost there. All you need to do now is enter the securities identification number (ISIN) or the identification number (WKN) in the search function of your securities account and follow a few simple steps. You can always find the number in brackets in our ETF recommendations.

We have put together in detail how you actually go about buying ETFs in the buying guide.

Exit time is crucial

Basically, you have the choice of investing a larger sum at once or, for example, saving monthly or quarterly in smaller installments in an ETF savings plan. It is not that important when you start saving: the main thing is that you stick with it in the long term. On the other hand, it is more important Exit time.

For example, if you know that you will need your ETF savings in five years, you shouldn't trust that stock market prices will be high at precisely this point in time. Instead, it is advisable to gradually reduce your ETF assets - that is, to sell ETF shares - and to park the money that is freed up in a call money account with good interest rates. We explain in more detail how something like this can look in the investment guide.

ETFs as the third component of financial investments

Finanztip recommends saving ETFs as part of the investment in addition to good overnight money and fixed-term deposits. How much you invest in each case depends on your budget and your level of risk. If you would like to know more about this, you can take a look at the different sample portfolios that we have calculated in the investment guide.

At the return-oriented portfolio Let us assume, for example, that savers park around 20 percent of their savings in a call money account in order to be liquid when they make urgent purchases. They invest the remaining 80 percent in globally oriented exchange-traded funds. Such a portfolio has never made a loss for any 15 years in the past.